Strategic Oil Reserves & Energy Security

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TOPIC: General Studies 3

• Energy – Oil
• Energy Security in the times of COVID-19

India’s Situation

India, the world’s third largest crude oil importer has an existing storage capacity of 5.3 million tonnes at Visakhapatnam, Mangaluru and Paadoor, built at an investment of $600 million in the first phase. This is operational and can support 9.5 days of net imports. In addition, the government has approved the construction of an additional 6.5 million tonnes of strategic crude oil reserves. Strategic crude oil reserves, which are typically state-funded and meant to tackle emergency situations, allows a country to tide over short-term supply disruptions. 

International Energy Agency members maintain emergency oil reserves equivalent to at least 90 days of net imports. India will have oil reserves equivalent to at least 87 days of net imports, once the $1.6 billion second phase of Indian Strategic Petroleum Reserves, which aims to add 12 days of crude storage, is operational. These facilities together will help support 22 days of India’s crude oil requirements. Indian refiners also maintain 65 days of crude storage, taking the total tally to 87 days.

• First, capacity does not directly translate into utilisation, which is partly because oil is an expensive commodity most days of the year. In 2019, the average closing price of a barrel of crude was $57.05. In 2018, it was $64.90, and in 2017, U$50.84. Of the existing 10 days of capacity, only about 50 per cent is utilised.
• The second issue is with regard to the refinery holdings. In India, the SPR arrangement between the oil refineries and the Union or state governments is not specified well, though most of the refineries that hold stock are publicly-owned companies. In fact, a breakdown of which refineries hold SPR and in what form (crude or refined) or information about where they are located is not publicly available.

So, the way forward is …

Introduction of transparency and accountability in relation to the SPR: 

• Timely and reliable dissemination of information
• The SPR mobilisation process could be made more efficient by laying out designated roles for different agencies to avoid redundancies in times of crisis. 

• There should be role and process clarity regarding SPR mobilisation. For instance, to begin with, there should be clarity on who (or which agency) can define an emergency and therefore order a mobilisation.

In order to mitigate risks better, India should look to diversify its SPR holdings: Diversification can be based on geographical location (storing oil either domestically or abroad), storage location (underground or overground) and product type (oil can be held in either crude or refined form). 

• Storage and transportation costs could be saved by diversifying geographically. India can operationalise, modernise, and add to the oil tanking facilities at Trincomalee in Sri Lanka. India can also enter into a strategic partnership with Oman (Ras Markaz) for oil storage, which would also help India avoid the potential bottleneck of the straits of Hormuz. However, since many of these places could potentially be vulnerable to geopolitical risks, only a small part of India’s overall SPR strategy should involve storing abroad.
• Diversification could also be in the form of ownership — either publicly owned through ISPRL or by private oil companies, such as ADNOC of Abu Dhabi, which could fill up the SPR when prices are low and take advantage of price arbitrage. This could achieve a degree of price stability and reduce the cost for India to buy such large quantities of oil. But there is a need to have a clear contract with the private companies about the mandatory minimum level of stock that they should preserve for use in emergency times.

Use alternatives like natural gas: India should increase its imports of gas (LNG ) from Australia, Africa and the US. 

• This will reduce the political risks of dependency on oil supplies from the Middle East. Gas is also now economically competitive. 
• The landed price of LNG is low enough to kick-start some of the stranded gas-based power plants. India also needs to look at ensuring continuous, uninterrupted supply of LPG, which is the cooking fuel for almost all households. 
• With renewables like wind and solar gaining greater importance, securing critical minerals like cobalt (80% controlled by China), lithium (92% of lithium reserves are controlled by Chile, China, and Australia), nickel, aluminum, copper, etc, will be as important as having adequate SPR.

Let go of the tight bureaucratic authority: There is also a need to unthread the “patchwork quilt of authority” exercised by bureaucrats, regulators and politicians, which today stifles management and operational efficiency of the petroleum companies.

Integrated Energy Policy: India should create an institutional basis for an integrated energy policy. Also, the focus should be on increasing the efficiency of its oil companies. Government needs to think if oil companies should pivot away from oil and gas towards clean energy.

Connecting the Dots:

1. Sharp fall in oil prices is opportunity for India to increase stockpile. Why? Discuss.
2. As India suffers from a lockdown, a silver lining for future recovery and reconstruction is the price of oil. Comment.
3. What should India do now to prepare for an uncertain and contingent energy future post COVID? Enumerate.
4. Essay: 
   1. Energy Security in the post-COVID world
   2. The post-COVID world (will be) switching from just in time to just in case